S&P Equity Research Issues Paper & Forest Products Industry Predictions for 2011

NEW YORK, Jan. 26, 2011 /PRNewswire/ -- Standard & Poor's Equity Research expects paper demand in 2011 to be generally positive, as it expects the economy to continue to expand modestly this year. S&P Equity Research says producers have taken aggressive steps to optimize output on both a temporary and permanent basis, and it thinks these moves will allow prices to remain at elevated levels.

In a sign that company managements are feeling better about the financial situation, dividend payouts have risen and, in some cases, significantly. In fact, two companies that had eliminated their dividends, Wausau Paper (WPP 9 ***) and Domtar (UFS 87 ****), reinstated their payouts, and Buckeye Technologies (BKI 21 ***) instituted a dividend for the first time in its history. International Paper (IP 29 ****) increased its payout twice in the past year.

"We expect the price for market pulp to remain near current levels, or decline somewhat in 2011, after a significant advance over the past couple of years," said Stuart Benway, Paper & Forest Products Equity Analyst at S&P Equity Research. "Pulp is used in all grades of paper and paperboard, and its price can be quite volatile. Inventories remain in balance by historical standards, which we believe will prevent a collapse in prices. We expect prices for fluff pulp, which is used in towels and tissues, to remain fairly steady, as demand growth in the worldwide economy and continued expansion in developing markets, is matched by capacity increases."

Mr. Benway's other predictions for 2011 in the paper and forest products sectors are listed below.

1.  For newsprint, we expect domestic demand to continue to decline. With the increasing use of alternative news sources, this category has been in a long-term downtrend. Producers in this grade have been acutely aware of the declining demand trends and have either shut down capacity permanently or shifted capacity to other grades. One positive factor for the newsprint sector is that demand is increasing in certain emerging markets where newspapers are still a primary source of information.

2.  Although we think the long-term outlook for printing papers is not promising given the secular impact of technology on demand, we think conditions will be generally favorable for higher profits in 2011. Prices remain at high levels and no new capacity is expected to be added to the sector. In coated papers, the shutdown of about 6% of North American capacity should lead to much higher prices in this category this year.

3.  We expect conditions in the containerboard market to remain fairly strong in 2011. Because boxes are used to ship a wide variety of consumer and industrial goods, this segment is one of the most economically sensitive. However, unlike some other paper grades, demand for containerboard has not been affected by secular changes in print communications. We expect linerboard prices in 2011 to hold onto their gains due to balanced inventories, capacity closures, and a gradually recovering economy.

4.  Most of the risk for paper producers in 2011 involves rising raw materials prices, in our view. Higher pulp prices are good for those producers that sell market pulp, such as Domtar, but it can hurt margins for those that do not, such as Wausau Paper. Costs for old corrugated containers (OCC) have also surged in recent months, as demand from China for the raw material has been very strong, as China has added significant paper making capacity over the past couple of years.

5.  In the forest products sector, we think demand this year will be largely dependent on the pace of recovery in the housing sector. A composite price of framing lumber peaked at $367 per thousand board feet in late April 2010, versus $210 in the prior year's period. Then, the price fell to $240 per thousand board feet last August, but it then rebounded to $305 as of the middle of January 2011. S&P economists expect a gradual recovery in housing this year, with a forecast of a 14% increase in starts to 670,000 units. We believe this will support the recent rise in wood products prices.

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